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Economic Review
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By 1994, Sweden had a budget deficit of 10 percent of GDP, highest among OECD countries. Its public debt had doubled in three years. Such high debt levels were threatening Sweden's economic stability and making it increasingly vulnerable to disruptive global capital market flows. The new government that took office in late 1994 put in place an aggressive fiscal consolidation program aimed at reducing the deficit significantly by 1997 and balancing the budget by 1998. Sweden's finance minister Persson discusses his country's recent efforts to reduce its budget deficit. In overview remarks made at the bank's 1995 symposium, "Reducing Budget Deficits and Debt: Issues and Options," Persson identified three elements that are required for a fiscal consolidation to be successful. First, the program must be designed so that the burdens are shared equitably. Otherwise, public support, which is absolutely essential, will be lacking. Second, and related, the consolidation program must be comprehensive, rather than a collection of ad hoc measures, making it clear to interest groups that everyone will be asked to make sacrifices. And third, the reform process and budgeting procedures should be as transparent as possible. Only in this way can credibility be established and maintained. Back to top Economic Review home
Canada has run persistent deficits for years and has seen its debt rise steadily. Net federal debt as a percentage of GDP has increased in the last 15 years from 30 percent to 73 percent. Interest charges alone account for almost 34 cents of every federal revenue dollar. In response, the Canadian government has taken aggressive action over the last two years. Canada's finance minister Martin explains how Canada has addressed its fiscal problems. In the luncheon address of the bank's 1995 symposium, "Reducing Budget Deficits and Debt: Issues and Options," Martin explained that the centerpiece of the Canadian program has been to commit to an interim deficit target on the way to an eventual balanced budget. While the interim target is ambitious, Martin is confident it will be achieved because of the strong measures contained in the two most recent federal budgets. The budgets provide for a 10 percent reduction in program spending by 1996-97, making Canada the only G-7 nation to budget an absolute decline in program outlays. How has the Canadian government been able to bring about such sweeping fiscal reform? The most important factor, according to Martin, has been public support. The public has come to understand the severity of the problem and regards the reform measures as balanced and fair. Back to top Economic Review home
In setting monetary policy in 1995, the Federal Reserve sought to promote sustainable economic growth and continued progress toward price stability. Toward those ends, the Federal Reserve adjusted the stance of monetary policy three times in 1995. In February, amid signs of increasing inflationary pressures, policy was tightened. In July and December, in response to signals of a slowing economy and abating inflationary pressures, policy was eased. Clark reviews inflation developments in the United States during 1995. The first section examines the actual behavior of inflation over the past year. The second section examines developments in inflation expectations in 1995. The third section describes the contents and rationale of legislation introduced in Congress in 1995 that would make price stability the primary long-run goal of Federal Reserve monetary policy. Clark concludes that inflation developments of the past year were largely favorable. Although some important inflation measures, notably the consumer price index, rose slightly relative to the previous year, inflation overall remained moderate. Moreover, expectations of inflation declined in 1995, so that future inflation is generally expected to remain near the current level. The Federal Reserve, therefore, appeared to be successful in maintaining moderate inflation during the year and in convincing the public that inflation will remain moderate in the period ahead. Back to top Economic Review home
Since the adoption of a flexible exchange rate system in 1973, central banks of most industrialized countries have continued to intervene in foreign exchange markets. One reason is that exchange rate volatility has increased. To reduce volatility, many European countries have agreed to keep exchange rates within a band around a target exchange rate, implementing this policy by intervening in foreign exchange markets when necessary. Even without an explicit exchange rate commitment, countries such as the United States and Japan have intervened in foreign exchange markets to help stabilize exchange rates. Opinions differ on whether central banks can stabilize exchange rates. Some analysts believe central bank intervention can reduce exchange rate volatility by stopping speculative attacks against a currency. Other analysts, though, believe central bank intervention may increase volatility if the intervention contributes to market uncertainty or encourages speculative attacks against the currency. Bonser-Neal presents empirical evidence on this controversy. Her evidence suggests that central bank intervention does not generally reduce exchange rate volatility. Rather, central bank intervention typically appears to have had little effect on volatility. Back to top Economic Review home
The Tenth District economy posted a healthy gain in 1995, although growth slowed from the vigorous tempo of the year before. The district slowed sharply in the spring, but activity rebounded somewhat later in the year, in a pattern similar to that in the national economy. The district's main economic engines in 1994--construction, manufacturing, trade, and services--downshifted to a more moderate pace of growth in 1995. Activity in the district's energy industry remained sluggish, due to weak prices for crude oil and natural gas; and financial losses in the cattle industry held down the income of district farmers, despite a surge in crop prices. Growth varied widely across the district. New Mexico was again the star performer, leading the district for the second consecutive year. Growth in Oklahoma, Kansas, and Colorado also was strong, while growth in Missouri, Nebraska, and Wyoming was more moderate. Barkema reviews developments in the district economy. The outlook for 1996 points to continued moderate growth, probably slightly below the 1995 pace. The economy's healthy tone overall should support further modest gains in services and trade. Activity in the construction industry may rebound slightly from the slowdown in 1995, with a modest recovery in homebuilding and a steady pace of commercial and public works projects. Manufacturing activity may slip somewhat, as the mountain states' industrial expansion slows. Flat energy prices, however, are unlikely to encourage much exploration and drilling activity in the district's energy industry. For the district's farm economy, higher crop prices brighten the outlook, even though the profit picture for the cattle industry remains relatively bleak. Back to top Economic Review home
U.S. agriculture appears to be passing into a new era marked by both greater risk and potentially greater rewards. Pending legislation would lower the government safety net that for decades has supported farm incomes and reduced the risk of farming. If signed into law by the President, the new farm bill would phase down government payments to farmers over the next seven years, but in exchange would give farmers more flexibility to plant the crops that take best advantage of market opportunities. That switch in policy will occur just as the industry faces the brightest prospects in world commodity markets in decades. U.S. crop prices closed out 1995 at the highest levels in years, in part due to a surge in U.S. agricultural exports. The year just past set the stage for the new period ahead. The farm legislation crafted by Congress in 1995 would mark a watershed in farm policy, leading farmers to rethink what they produce and creating potentially big shifts in farm production across the nation. Another major development in 1995 was a shortfall in U.S. crop production. With stocks already low when 1995 began, the year's crops were crucial in determining whether grain stocks would be restored to the ample levels that have prevailed through most of the 1990s. In the end, the shortfall in production appears to have created tight market conditions that now might hold for an extended period. U.S. farm income was unchanged in 1995, as rising grain prices were offset by another year of losses in the livestock industry. Drabenstott examines the developments in agriculture in 1995 and the outlook for 1996. U.S. agriculture should have a better year in 1996, although poor livestock profits will restrain gains in income. In the longer run, agriculture's outlook will be driven by the major developments of 1995, a new course for agricultural policy and a bullish turn in world food markets. |